DEPARTMENT OF DEFENSE - Comptroller

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Federal Managers’ Financial Integrity Act Department of Defense Agency Financial Report 2007 The Federal Managers’ Financial Integrity Act (FMFIA) requires Federal agencies to assess the effectiveness of internal management controls for all program, operational, and administrative areas and not just accounting and financial management. Internal management controls are the checks and balances that help program and financial managers achieve results and safeguard the integrity of their programs. Internal management control strengthens integrity and accountability within programs and operations, and : • Is critical for “good government” • Demonstrates responsible stewardship over assets and resources • Promotes accountability of Departmental assets and of our leadership • Enhances the sound delivery of services to customers • Maximizes desired program outcomes. DoD Managers’ Internal Control Program The Department conducts self-assessments of the internal management controls under a formalized program known as the Managers’ Internal Control Program, which is conducted throughout the Department to include forward deployed units such as the Multi-National Forces - Iraq. Using assessments according to the Office of Management and Budget Circular A-123, “Management’s Responsibility for Internal Control,” as the basis, the Department prepared the fiscal year 2007 Annual Statement of Assurance (presented in the Management’s Discussion and Analysis section of this report). The Department asserts that all Components as prescribed by the Department’s regulatory guidelines have reported their individual statements of assurance over internal control to the Secretary. The Department’s internal management control program is divided into two main processes: 1) The overall operations statement of assurance that covers the effectiveness of internal management controls for all functions and processes except for the financial reporting. 2) The statement of assurance over financial reporting which covers the effectiveness of internal management controls as prescribed by Appendix A of the OMB Circular A-123. The Department has 34 entities required to report including (3) Military Departments, (9) Combatant Commands, (1) Joint Staff, (1) Office of the Secretary of Defense, (1) Office of the Inspector General, (18) DoD Agencies, and (1) DoD Financial Reporting Senior Assessment Team. Components are required to conduct a robust programmatic approach to establishing and assessing internal management controls for the overall operations with the Component heads annually providing assurance to the Secretary of Defense. Only specified Components are also required to include financial reporting assurance. The Department uses these feeder statements as the basis for the Department’s Statement of Assurance. The Department has dramatically reduced the number of outstanding material weaknesses since fiscal year 2001, by 84 percent from 116 material weaknesses to 19 in fiscal year 2007. The percentage of material weaknesses resolved rose from 21 percent in fiscal year 2006 to 34 percent in fiscal year 2007. Types of Self-Reported Material Weaknesses The Department reports several types of weaknesses. Table 1 shows the material weaknesses in financial statement reporting that were identified by the Department of Defense Inspector General, who audits the annual financial statements. Table 2a identifies financial reporting weaknesses, Table 2b identifies overall material weaknesses, and Table 2c identifies system nonconformances identified by the Department through its internal management control process. Details about each weakness to include definitions and actions to resolve them are presented in expanded tables available at http://www.defenselink.mil/comptroller/afr/fy2007/fy07afrsection3fmfia.pdf 3
Department of Defense Agency Financial Report 2007 , Table 2d summaries the Department compliance with the Federal Financial Management Improvement Act of 1996. The Department self-identified weaknesses fall into three categories: 1. Section 2 Financial Reporting Material Weaknesses: Weaknesses identified as materially affecting the Department’s financial reporting identified under the oversight of the DoD Senior Assessment Team during the limited assessment of internal controls over financial reporting. The Department is using an incremental approach in complying with the OMB Circular No. A-123, Appendix A. In fiscal year 2007, the assessments conducted include: fund balance with Treasury, investments, accounts receivable, inventory, operating materials and supplies, real property, military equipment, accounts payable, Federal Employees’ Compensation Act liabilities, environmental liabilities, Medicare-Eligible Retiree Health Care Liabilities, and appropriations received. 2. Section 2 Overall Operations Material Weaknesses: Weaknesses materially affecting internal management controls usually affecting multiple DoD components for all functions except financial reporting weaknesses unless those financial weaknesses were identified through assessments which were not under the oversight of the DoD Senior Assessment Team. At this time, there is only one material weakness, General Personal Property, that is functionally part of the financial reporting, but is included in the overall material weakness category because the assessment did not fall under the oversight of the DoD Senior Assessment Team. 3. Section 4 System Nonconformance Weaknesses: Material weakness(es) in the system conformance with government-wide requirements such as the Federal Financial Management Improvement Act as prescribed by OMB Circular No. A-127. The Department is reporting one weakness that covers the entire pervasive problems identified with system nonconformance. DoD Reportable Conditions. Weaknesses identified as materially affecting only one DoD Component unless the weakness is so pervasive that it is deemed material to the Department as a whole. Reportable conditions, as prescribed in the OMB A-123, are not reported in the DoD Statement of Assurance, but are tracked internally for correction. The Department is reporting five weaknesses in fiscal year 2007 as a reportable conditions that were previously reported as material weaknesses. In addition to FMFIA, the DoD reports as material weaknesses, the lack of conformance with the Federal Financial Management Improvement as item number 19 in Table 2b, Summary of Management Assurances, Other Accompanying Information, and significant deficiency in information security under the Federal Information Security Management Act as item number 20 in Table 2b. Improvements As A Result of Statement of Assurance Scorecard The Department implemented a Statement of Assurance scorecard in fiscal year fiscal year 2003, which scores the DoD Component performance in five categories: timeliness, format and accuracy, extent of program execution, extent of training, and prompt resolution of material weaknesses. The DoD Statement of Assurance scorecard provides extra credit points for exceptional performance, which has created a friendly competitive energy to improving the DoD Statement of Assurance and more prompt resolution of material weaknesses. In addition, the DoD implements a quarterly review and each mid-year provides the DoD Component Heads an indication of their success rate in resolving weaknesses as projected in comparison to the other DoD Components. Since initiating the scorecard and quarterly reviews in fiscal year 2003, DoD Components have significantly improved the timeliness of the reporting and promptness of material weakness resolution. Timeliness has improved from only 48 percent on time in fiscal year 2003 to 97 percent in fiscal year 2007. The mean score for the timeliness category rose 9 percent from 2.4 in fiscal year 2006 to 2.6 percent in fiscal year 2007. The total number of outstanding material weaknesses decreased by 46 percent from 35 in fiscal year 2006 to 19 in fiscal year 2007, and the mean score for promptly resolving material weaknesses rose 25 percent from 2.0 in fiscal year 2006 to 2.7 in fiscal year 2007. 4
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DEPARTMENT OF DEFENSE - Comptroller

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